March 18, 2010 / 11:03 AM / 10 years ago

RPT-DEALTALK-U.S. companies looking to shale, this time for oil

(Repeats Wednesday item to additional subscribers) (For more Reuters DEALTALKS, click [DEALTALK/])

* Independent oil and gas cos look to raise oil exposure

* Deals in oil shale expected to rise-bankers

By Michael Erman and Anna Driver

NEW YORK/HOUSTON, March 17 (Reuters) - Independent U.S. oil and gas companies are scrambling to pick up land where oil is trapped in shale formations in a bid to benefit from relatively high prices for the commodity.

Companies and investors are increasingly scouring the country for shales rich in oil and natural gas liquids rather than the gas-rich shales that had been the focus of a series of recent deals.

As a result, the Niobrara Shale in Colorado and the Bakken Shale in North Dakota have started to replace hot names like the Haynesville and Marcellus shales as the “next big thing.”

The independents have in recent years been focused on natural gas production as advances in technology like hydraulic fracturing and horizontal drilling allow them to tap natural gas trapped in these shale formations.

These companies are now looking to use the expertise they have gained from natural gas production in the shale to drill for oil locked in similar formations.

Two of the largest independents — Chesapeake Energy (CHK.N) and Anadarko Petroleum Corp APC.N — are near the front of the pack of companies in the land grab.

“It’s going to be the story of 2010,” said one banker at a major investment bank, who said anything the companies can do to produce more oil would be a benefit for them.

“Independents are more bullish on the prospects of (crude oil prices) versus gas,” he said.

Historically, crude oil has tended to trade between 9 to 11 times natural gas prices. But with crude at around $82 a barrel and natural gas at around $4.30 per million British thermal units, that ratio is currently 19 times natural gas prices.

In response to this imbalance, the independents are rushing to pick up acreage in shale plays like the Bakken, Eagle Ford and the newly-hot Niobrara that are rich with oil and natural gas liquids, which also command higher prices than “dry” natural gas.

“The technology is pretty much the same” to drill for oil or gas in shale, said Macquarie Research analyst Jason Gammel. “So if you can find an application that produces oil rather than gas, given how much of a premium oil trades to gas, that would be your preference.”

HOT OIL

At a private capital conference held in Houston in February, buyers and sellers agreed that the competition for oily assets is growing fierce.

“Right now oil is hot,” John Moon, partner and managing director at Morgan Stanley Private Equity, said. “A couple of years ago, gas was hot.”

At that same meeting, R. Carter Overton, the chief executive officer of Red Arrow Energy LLC, said investors were “going crazy” for plays like the Bakken Shale in North Dakota, where the company is developing 140,000 acres.

Companies are looking for acreage in these shales as their positions in previous hot spots like the Marcellus Shale — which spans parts of Pennsylvania, West Virginia, and New York — have started to pay off.

Major oil companies like BP Plc (BP.L), Total (TOTF.PA) and Exxon Mobil (XOM.N) have bought into these gas plays through acquisitions and joint ventures that has given independents cash to drill more wells and acquire acreage elsewhere.

Indeed, Chesapeake Energy — one of the nation’s largest natural gas producers — said last month that it is aggressively putting together acreage in six new oil plays [ID:nN18220467].

Anadarko recently touted positions in the Niobrara shale, as well as the Eagle Ford in South Texas.

And on Monday, MDU Resources (MDU.N) said it had purchased 40,000 acres for development in the Bakken and another 27,000 acres in the Niobrara.

The activity can be expected to continue, energy investment bankers said.

As the companies look to pick up land in these areas, smaller companies that have already established themselves could be targets as well.

Brigham Exploration BEXP.O, American Oil & Gas AEZ.A and Kodiak Oil & Gas KOG.A, all in the Bakken, could be targets for companies looking for a quick entry into the play, one banker said.

Brigham and Kodiak could not immediately be reached for comment. American declined to comment on the matter. (For more M&A news and our DealZone blog, go to www.reuters.com/deals) (Reporting by Michael Erman and Anna Driver; Editing by Tim Dobbyn)

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